NEW DELHI (Reuters) - A battle over affirmative action for low castes threw parliament into disarray on Monday, threatening to derail the government's ambitious timetable for passing reforms this week that are aimed at opening up Asia's third-largest economy.

The Lok Sabha was due to vote on a bill to attract more foreign investment to banking, but proceedings were repeatedly disrupted by members of parliament angry at a plan to allow lower castes preferential promotions in government jobs.

"It won't happen, shut it down," shouted the MPs from the Samajwadi Party (SP) who surrounded the speaker's podium in the house. The house was finally adjourned until Tuesday.

The SP represents mainly the Yadav caste, may of whom are lower middle class, along with poor Muslims. Its supporters will not benefit from the promotions quota bill, which is aimed at lifting members of the lowest castes in the Hindu hierarchy.

In the SP's home state of Uttar Pradesh, thousands went on strike from government offices and burned posters of Sonia Gandhi, chief of the ruling Congress party.

Prime Minister Manmohan Singh's government wants parliament to approve policies aimed at attracting foreign capital into banking, insurance and pensions before a recess this week, along with a bill to help land acquisitions for industrial and infrastructure projects.

The measures are part of a package of policies the government and business leaders say are needed to stabilise India's economy, which is running high fiscal and external deficits and is on track for the weakest year of growth in a decade, at below 6 percent.

Disruptions are common in parliament. In the first three weeks of the month-long session the government has passed no major reforms but it was able to fight off resistance to a flagship policy to allow foreign supermarkets to trade in India.

The government does not have a parliamentary majority and relies on support from the SP as well as its bitter rival, the Bahujan Samaj Party (BSP), which draws its support from low caste dalits, formerly know as untouchables.

"We will vote against the bill. We want similar reservation for OBCs and minorities. The bill in the present form would divide society," SP general secretary Mohan Singh said.

The chaos in parliament underlines the problems the government will face in coming months as it tries to balance the conflicting demands of allies in order to pass the economic reforms and big ticket welfare programs ahead of general elections due in early 2014.

The Rajya Sabha is expected to vote later in the day on a constitutional amendment to allow the affirmative action measure. SP leader Mulayam Singh has threatened to withdraw support from the government over the caste bill, which is supported by most other parties.

However, analysts say the SP may be reluctant to withdraw support totally from the government because of a legal investigation into Singh's assets. At the weekend the party accused the ruling coalition of blackmailling him with the threat of further investigation by a federal agency.

Sixty years after independence for Britain, issues around caste still play a major role in Indian politics, with leaders from the dalit castes - formerly called untouchables - fighting for quotas for sought-after government jobs.

Both Mahatma Gandhi and India's 1949 constitution sought to unravel the caste system, but the identity politics of quotas has become a powerful electoral tool for parties across the spectrum, affirming rather than abolishing stratification.

The idea of preferentially promoting people from low castes through the civil service, not just reserving some jobs for them, is particularly controversial and was opposed even by the dalit politician responsible for crafting the constitution, B. R. Ambedkar.

(Additional reporting by Sharat Pradhan in LUCKNOW and Nigam Prusty in NEW DELHI; Editing by Sanjeev Miglani)

Trending On Reuters

REUTERS EXCLUSIVE

India's main public health programmes, aimed at millions of rural poor, have been in disarray for months because the government changed the way that over $1.3 billion in funds were distributed, according to data and letters seen by Reuters. Full Article | Graphic: India's health funding